3 COMPANY LAW

CHARACTERISTICS OF COMPANY

The most distinguishing

characteristics of a company are
following:
Mode of Formation or Creation: A
company is created when it is
registered under the Companies
Ordinance, 1984. It comes into
being from the date mentioned in the
certificate of incorporation.

CHARACTERISTICS OF
COMPANY
It may be noted in this connection
that Section 14 (1) provides that no
association, partnership or company
consisting of more than 20 persons
be formed to carry on any business
for gain unless it is registered as a
company, under the Companies
Ordinance, 1984 and is deemed to
be an illegal association, if it is not so
registered.

Artificial Legal Person

2 Artificial Legal Person: A
company is an artificial person.
Negatively speaking, it is not a
natural person. It exists in the eye of
the law and cannot act on its own. It
has to act through a board of
directors elected by the shareholders.

Artificial Legal Person

It was rightly pointed out in
Bates v. Standard Land
Co. that: The boards of
directors are the brains and
the only brains of the
company, which is the body
and the company can and
does act only through them.

Artificial Legal Person

But for many purposes a
company is a legal person like a
natural person. It has the right to
acquire and dispose of the
property, to enter into contract
with third parties in its own
name, and can sue and be sued
in its own name

Separate Legal Entity

3 Separate Legal Entity: This
means that a company has a legal
entity distinct from and independent
from and independent of its
members. The creditors of the
company can recover their money
only from the company and the
property of the company. They
cannot sue individual members.

Separate Legal Entity

Similarly the company is not in any
way liable for the individual debts of
its members. The property of the
company is to be used for the benefit
of the company and not for the
personal benefit of the shareholders.
On the same grounds a member
cannot claim any ownership rights in
the assets of the company either
individually or jointly during the

Separate Legal Entity

The principle of separate legal
personality was explained and
emphasized in the famous case of
Salomon v. Salomon & Co. Ltd. It
was held that once the company
was incorporated under the Act, it
had
separate
legal
entity
independent of its members.

Limited Liability
4 Limited Liability: One of the

important advantages of the

company is that liability of its
members is limited. In the case
of a company limited by
shares, the liability of members is
limited to the extent of the nominal
value of shares held by them.

Limited Liability
If a shareholder has paid the
full nominal value of shares
held by him, his liability is
nil. This means that a
shareholder remains liable to
pay the unpaid value of
shares, if any.

company limited by
guarantee
In the case of a company limited
by guarantee, the liability of each
member is to contribute a specific
amount to the assets of the company
in the event of its being wound up
while he is a member or within one
year of his cease in globe a member.

company limited by
guarantee
In effect, we find that a
member is not directly
liable to a companys
creditors but he is a limited
guarantor of the companys
debts in both cases.

company limited by
guarantee
However, the Companies
Ordinance, 1984 does not
prevent the companies from
making the liability of its
members
unlimited.
But
such companies are very
rare.

Perpetual Succession
5 Perpetual Succession: A company has
perpetual succession and is independent of the
life of its members. Its existence is not
affected in any way by the death, insolvency
or exit of any shareholder. During the war all
the members of one private company, while in
general meeting, were killed by a bomb. But
the company survived; not even a hydrogen
bomb could have destroyed it.
L.C.B. Gower, Principles of Modern Company
Law, London. Stevens and Sons, (3rd ed.) 1969

Perpetual Succession
A company can be compared with
a river which retains its identity
through the parts which compose
it
are
constantly
changing.
Perpetual succession thus means
that in spite of a change in the
membership of the company, its
continuity is not affected.

Transferable Shares
6 Transferable Shares: In a public company,
the shares are freely transferable. The right to
transfer shares is a statutory right and it
cannot be taken away by the provision in the
articles. However, the articles shall prescribe
the manner in which such transfer of shares
will be made and it may also contain bona
fide and reasonable restrictions on the rights
of the members to transfer their shares. But
absolute restrictions on the rights of members
to transfer their shares shall be ultra vires.

Transferable Shares
However, in the case of a
private
company,
the
articles shall restrict the
rights of members to
transfer their shares in
compliance
with
its
statutory definition.

Common Seal
7 Common Seal: A company is an
artificial person. It cannot act on its
own. It acts through natural persons
who are known as directors. All
contracts entered into by the directors
must be under the common seal of the
company. The common seal, with the
name of the company engraved on it,
is used as a substitute for its signature.

Common Seal
No document issued by the
company shall be binding
on it unless it bears the
common seal which is duly
witnessed by at least two
directors of the company.

Separate Property
8 Separate Property: A company
has a separate legal personality which
is entirely distinct and independent of
the persons who constitute it. It has
the right to own and transfer property
in its own name. The property of the
company is to be used for the
companys business and not for the
personal benefit of its shareholders.

Separate Property
Members
have
no
direct
proprietary rights to the companys
property, merely to their shares. It
is also important to note that the
claims of the companys creditors
will
merely
be
against
the
companys property and not that of
shareholders.

Large Capital
Large Capital: A public
company can raise its large
capital by issuing shares and
debentures to the public.
This large capital gives
confidence to the company
to excel other companies.

Can Sue & Be Sued

10 Company Can Sue & Be
Sued: As a legal person, a company
can sue artificial or natural person in
case of the infringement of its rights.
As company has a right to sue,
similarly it can be sued in case of
infringing the rights of other persons.
All the above characteristics of
the company are also known as
merits of incorporation.